AUD: The Only Carry Trade Out There

With Australia's interest rates locked near zero for as far as the eye can see, Boris Schlossberg calls the Aussie dollar (AUD) a carry trade worth taking and explains several ways to execute.

One of the currencies that traders are always watching is the Aussie dollar. Our guest today is Boris Schlossberg. Boris, what are your thoughts as we come into the middle of 2012 with the Aussie dollar?

I think the Aussie has been an incredibly frustrating trade for a lot of the shorts, because the conventional trade at the beginning of the year was that China is going to crumble and the Aussie is going to follow; interest rates are going to collapse and the Aussie is going to go back to parity.

In fact, we’re within striking distance of all-time highs still in the Aussie. I think it’s a testament to the resilience, 1) of the Australian economy; and 2) the resilience of the economy in Asia, in general. Despite the suspicion that China is going to have a hard landing, it’s actually had a relatively soft landing so far.

More importantly, the Australian economy has done really well. It’s come out with gangbuster employment data that was five times larger than the market thought—pretty much wiping out any idea that the Reserve Bank of Australia (RBA) is going to lower interest rates for the foreseeable future. I think that’s really what’s keeping the Aussie floating up.

At this point, it’s the only significant carry trade left in the market, and as long as that interest rate doesn’t go down any further, it just attracts so much capital.

When you look at the rest of the world, like Europe, Japan, and the US, the only thing you can say with absolute certainty is that interest rates are going to stay near zero for pretty much as far as the eye can see.

So, if you’re looking for yield, Aussie is your only answer, and that really provides a huge amount of support for the currency.

What’s the best trade there? Is it the spot forex trade, AUD/USD, or is it an ETF, or futures? What do you like?

That’s a really excellent question. If you bet that global growth remains on target for the rest of the year—so assume 2%-2.5% for the rest of 2012—then probably the ASX 200, the Australian stock index, is one of the greater plays, because it gives you the equity kicker.

If growth just goes to this level, equities are still going to continue to rally. Basically, if you’re bull on the Dow or the S&P 500, you’re a bull on the ASX 200, and you get, of course, the benefit of the Australian dollar.

The currency benefit should appreciate as well, and you pick up a dividend yield because the Australian stocks are very heavily influenced by the miners and all of the commodity trades in the Aussie.

So if you’re bullish Australia, Australian stocks are your best bet.

Is there an ADR or something that I can trade on US markets that reflects that?

There’s an ETF, the CurrencyShares Australian Dollar Trust (FXA), and yeah, you could probably go directly through that as a trade.